Linkage of Exchange Rate and Key Economic Indicators: A Panel Cointegration and Causality Analysis

Abstract

This study examined the relationship between exchange rate (ER) and key economic indicators. For empirical analysis, the study took a sample of countries with equal representation from developed and emerging economies. To retrieve the data for our study, we have accessed the World Bank database, individual country reports, and other sources deemed reliable to meet study objectives. For analysis of the data, the study initially checked the basic data properties, established its normality and stationarity with the help of different diagnostic tests. The study then applied Westerlund panel cointegration for estimation of cointegration, followed by Dumitrescu-Hurlin panel causality test to determine the nature and direction of causality among the variables. The results established the association of exchange rate with majority of the economic indicators selected for the study. Based on findings, the study recommended to assign significant consideration to exchange rate management for smooth functioning of the economies. Different policy implications and interventions were also suggested.

Keywords: Exchange Rate, Economic Indicators, Cointegration, Causality,